Cable was on a knife edge again this morning. For most of the session GBP/USD was again positioned tantalisingly close to the USD 1.700 resistance, pushing above it briefly on the release of better than expected UK June production data. For the most part range trading has dominated fx markets. A softer to mixed performance in stocks and a moderate fall in treasury yields reflects a slight bias for risk aversion this morning which is affording the USD and the JPY a little support on many of the crosses.
UK Jun industrial production rose 0.5% m/m, from a revised -0.7% m/m fall in May. The data follows the release earlier in the week of the July manufacturing PMI which at 50.00 was suggestive of growth in the sector in the first part of Q3. Also released this morning was the July Halifax house price index which at a stronger than expected +0.6% m/m underpins last week's stronger Nationwide house price survey and today's improved Nationwide consumer confidence data which at 60 is at its highest level for more than a year. Taken together these data strengthen the argument that the UK economy could see a return to growth by the end of the year and also lessen the likelihood that the BoE will extend it QE plan at tomorrow's policy meeting. A Bloomberg survey published ahead of this morning's data suggest that 8 of 12 primary gilt dealers see no extension of QE this week. In addition to the run up in cable, GBP/JPY and JPY/GBP also saw a sharp move on this morning's production data but like cable neither has been able to break out of recent ranges. The recent low for EUR/GBP lies around 0.8460, the recent high for GBP/JPY is close to 162.20. A decision by the BoE not to extend QE would risk a push by the pound into new ranges.
USD/CAD has continued its corrective upside bias. Comments from Finance Minister Flaherty that he is concerned about the recent rapid changes in the value of the CAD have revived concerns that the authorities are, after all, worried about too much CAD strength. Going forward this will strengthen the CAD1.0650 support area. The AUD and the NZD also lost ground vs the USD overnight on the general move away from risk. The NZD was the better performer supported by a surprise 25% increase in milk powder prices from a 5 year low. The Australian trade deficit was better than expected at –AUD441 mln in June; demand from China is being linked with the improvement.
Eurozone July services PMI followed the pattern set by the recent manufacturing PMI by showing a slowing in the pace of contraction. German data, however, deteriorated relative to June which is a reminder that the return to growth in German will likely lag that of the US and the UK. The ECB is not expected to alter policy during tomorrow's policy meeting. However, it will likely reinforce its commitment to generous liquidity provision.
This afternoon, the ADP employment data will be watched ahead of Friday's payrolls number. US July non-manufacturing ISM and June factory orders will also be watched for signs of stabilisation.
